November 25, 2020

Stock picks to buy, 44 cheap companies poised to surge: Morgan Stanley

  • Taking newly-released economic data into consideration, a team of Morgan Stanley equity strategists reiterated their belief that a V-shaped economic recovery is underway.
  • They explained why Phase III vaccine data in November could be the catalyst for the recovery to gain further momentum and drive the reopening ahead. 
  • The team used quantitative screening and leveraged analyst research to identify 44 stocks across industries that are poised to surge as the economic rebound and reopening take off. 
  • Visit Business Insider’s homepage for more stories.

Seven months into the coronavirus pandemic, questions still remain around whether the economy is still headed for a V-shaped recovery.

Morgan Stanley’s equity strategy team think it’s a firm “yes.”

Newly released economic data including expanding global purchasing-manager indexes, rising retail sales in the US and Europe, increasing global trade volume, and decreasing inventory levels are all pointing to an ongoing economic rebound, Morgan Stanley said in a Friday research note. 

However, it is the strength of the US consumer that cements the equity strategy team’s view on the “intact” recovery, wrote strategist Adam Virgadamo, noting that “US household personal income already reached 2% above pre-COVID levels in August.”

Further driving the recovery will be the efficacy data from three coronavirus vaccine candidates in November. Under “operation warp speed,” the US government has purchased hundreds of millions of COVID-19 vaccine doses from Pfizer, Moderna, AstraZeneca, Sanofi/GSK, and Novavax.

“Companies have been ramping production capacity such that hundreds of millions of doses could be available in the US within this time frame (each vaccination requires 2 doses to be effective),” said Virgadamo. 

He contineud: “We would expect broad-based dissemination of a vaccine to ultimately clear the way for the recovery to gain further momentum via the normalization of out of home activities.”

In anticipation of an effective vaccine, the team went out to identify undervalued stocks that have not priced in the ongoing recovery and coming reopening. 

They started with a quantitative screen of the equity universe for stocks that fit into the following criteria:

(1) A market capitalization exceeding $1 billion,

(2) An overweight or equal-weight rating from Morgan Stanley analysts,

(3) At least 15% off of below their pre-COVID highs, 

(4) Upside of at least 25% to their expected 2022 earnings per share from current next-twelve-month levels, 

(5) Implied price upside of at least 25% based on Morgan Stanley’s expected 2022 EPS multiplied by a normalized price-to-earnings multiple.

The team also excluded stocks with “high premiums to S&P 500” to avoid growth stocks that have grown into their multiples.

It further filtered the screen by asking Morgan Stanley analysts to select the stocks that are most sensitive to the economic recovery and reopening based on their research coverage.

The outcome is a list of 44 handpicked stocks spanning across industries and sectors.

Broadly, they fall into two categories: stocks that are linked to out-of-home activities — airlines, hotels, restaurants, casinos — or those tied to a broader economic recovery, such as trucking and equipment, banks, consumer finance, and brand name apparel. 

“We believe that exposure to complementary themes, end market diversity, and positive outlooks from our analysts position this list as a way to take reasonable exposure to the themes of reopening and recovery into 2021 while avoiding excessive concentration and stocks that have already priced in the fundamental upside into next year,” said Virgadamo and his team. 

The stocks — along with their tickers, price targets, and analyst commentaries — are listed below in alphabetical order:

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